11:33 GMT31 May 2020
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    Volkswagen suffers major consequences of its rigged emissions tests in the US, with the carmakers’ capitalization, stock market value and consumer market shares across the world are all in jeopardy – but the real battle is yet to come.

    Kristian Rouz — Market positioning and short-to-mid term growth prospects for the German carmaker Volkswagen (VW) AG were severely battered following the scandal over the discovery in the US that the car maker was 'fixing' its diesel engines' emissions rating. As the environmentalists' outrage spreads to VW's native European heartland, with its strong ‘green lobby', the automotive giant, must reserve a large part of its capitalization to pay off regulatory fines. Moreover, on Tuesday, VW's shares suffered a massive 20% plunge, stirring anxiety among shareholders amidst the possible news of new environmental probes from European governmental agencies. In the face of this new challenge, the very survival of VW might ultimately be in question.

    The German-based multinational has made a big expansion play, readying to take over the likes of Toyota and GM as the world's top automotive company and the share price collapse now puts this strategy at risk.

    VW's market presence is bound to shrink after the German enterprise admitted rigging its emissions tests in the US, when roughly 11 mln diesel-powered cars across the world turned out to be in breach of tough environmental regulations. On Tuesday, South Korea, Italy, France and Germany were reported to be among the nations set to conduct additional probes into the actual emissions of VW's diesel engines. Amidst the more competitive global automobile market, borne from overproduction and shrinking consumer demand as a result of devaluations decimating import demand of manufactured goods, VW's market share is in jeopardy.

    The carmaker could eventually be forced to leave the markets of select advanced nations, yielding to their competitors, as the so-called ‘green lobbies' across several countries might take their chance to support other automotive enterprises, either domestic or international.

    VW has by now announced that it has put aside 6.5 bln euros ($7.3 bln) from its planned Q3 capital as possible payoffs and fines to address current and future regulatory challenges, although the sum might increase.

    The German automotive giant's current fall is even more dramatic given as recently as in 2013 VW was gearing up to rule the world, with the volume of manufactured and shipped cars skyrocketing and demand booming. In the US, VW chose to concentrate on diesel engines as more appealing to a wider selection of potential customers. The strategy proved right, as car sales rose by 49% in 2008-2013, while VW's competitors like the domestic GM and Japan's Toyota struggling amidst the global economic turmoil.

    Now all the glory is all but over.

    This week's equity plunge wiped some $88 bln off of VW's capitalization (a massive 41% crash), while impending fines under the US Clean Air Act are reaching about $18 bln. Thus the financial consequences of regulative measures might exceed the actual market value of the entire company, as VW shares are continuing their slide, while further fines may be imposed in other nations outside the US. 

    Rigged emissions tests, however, are only a trigger to a possible broader financial demise of VW, as over several recent years the German carmaker, striving to increase its market share by all means possible, has been involved in too many risky financial operations. According to this year's "GovernanceMetrics" rating by MSCI Research, VW performed worse than 72% its comparable peers in terms of ‘corporate behaviour', including corporate finance management.

    Moreover, during the period 2009-2015, VW was ordered to recall only about 500,000 cars due to irregularities. The current recall of 11 mln vehicles is a huge blow to the company's commercial performance. VW sales of cars with non-compliant diesel engines have been put on halt in the US, while the company is working to fix the technical sides of things.

    Amongst all the gloom, however, there is a significant upside to VW's seemingly dire situation. The enterprise owns a line of several well-recognized and consumer-respected brands like Audi, Skoda, Porsche, Bentley and Lamborghini, not to mention the Volkswagen brand itself. The reputation of these cars are unlikely to suffer from the environmental scandal, however, green lobbies in select nations might make it more difficult for VW to actually get to its target audience.

    Moreover, in 2014, VW's revenues by region were as follows: 122.86 bln euros for Europe, 38.11 bln euros for Asia-Pacific, 27.62 bln euros for North America, and 13.87 euros for South America. That said, VW's major battle is in front of it — that is, with the European environmentalists, as it is the European market that generates the lion's share of VW's revenues. Besides, the carmaker could consider expanding into the less regulated South American and Asian markets — VW's brand reputation easily allows for that.

    As outrage spreads amidst green lobbies across the advanced nations, the battle is not yet lost for VW. Actually, it has not even started yet.


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